| My Mother always told me, “it’s not what you make it’s what you spend”. It is amazing how true this is.
It is my business to help individuals save for their retirement and other financial goals, such as sending their children to college, buying a second home, insuring against long term care needs, etc. The basis of any financial plan is establishing a goal and developing a plan of action on how to reach that goal and then implementing the plan. What might be the most important step is to review your progress.
This is also true when you have reached the goal of “retirement”. It is still important to assess where you are at financially and whether your “spending policy” is sustainable throughout your retirement years.
The first step you need to take is to know how much you spend. You should pay as much attention to your spending as your portfolio performance. The question needs to be asked “How much spending is right?” What are your goals? Do you want to leave a legacy to your heirs or do you want to maintain a certain lifestyle? If the answer to this question is lifestyle then you need to know if your spending rate is sustainable.
SPENDING RATE TRUMPS ALLOCATION
PROBABILITY OF MEETING CORE NEEDS OF A 65-YEAR-OLD COUPLE: MORTAILITY-ADJUSTED
..............................Very Conservative.......... Balanced..........Very Aggressive
................................ (20% Stocks/............(60% Stocks/........(100% Equities)
Spending Rate............ 80% Bonds)...............40% Bonds)
3%...............................>98%........................>98%......................95%
4%.................................84%...........................89%.....................85%
5%.................................51%..........................67%.....................68%
Based on AllianceBernstein’s estimates of the range of returns for the applicable capital markets. Data does not represent any past performance and is not a promise of future results. Source: Society of Actuaries and AllianceBernstein
As you can see by this table, if a 65-year-old couple is spending at a rate of 3% to 4% they have the best chance of preserving their wealth. At a spending rate of 5%, you can see that the Very Conservative investor is depleting their wealth considerably and even the Balanced and Very Aggressive allocation can not keep up with this rate of spending.
There is nothing wrong with having the lifestyle you want in retirement and not leaving a legacy for your heirs but the tricky part is people don’t come with an expiration date. You don’t know if you will have 5, 10, 25 or 35 years in retirement.
Retirement income and spending planning can be as crucial to your retirement as the accumulation phase was. If you would like to learn more, please call the Prior Lake State Investment Center at 952-440-0954 for a free consultation. |